Pension fund regulator makes the right move

The pension fund regulator has done well to raise the commission for distributors of the National Pension System (NPS). A higher return for the banks and financial institutions that open NPS accounts for subscribers will motivate them to market the scheme better.

From January 16, distributors are charging Rs 100 to open an account and 0.25% of the amount contributed initially by the subscriber, subject to a minimum of Rs 20 and a maximum of Rs 25,000. A subscriber is also being charged 0.25% for every transaction. PoPs can negotiate these charges with subscribers, but that is going to be cumbersome. Also, the amount is meagre at the lower end.

Yet, the new ad valorem commission structure will induce distributors to market the NPS. Bolder reforms are needed to incentivise fund managers and popularise the NPS, which has the institutional framework to generate superior returns on old-age savings. The government must make better use of its pension subsidy: instead of augmenting every voluntary subscription below Rs 12,000 by Rs 1,000, the government should use its money to underwrite initial overhead costs in asset management, distribution and record-keeping. The wafer-thin asset management charge of 0.0009% should be supplemented with a grant till sufficient scale is achieved.

Similarly, money should be provided from the Budget to meet central record-keeping costs. The regulator should drop its plan to allow fund managers to negotiate fees with subscribers. Fund managers manage a pool of savings and cannot be expected to negotiate charges with individual subscribers.

In any case, why create incentives for differential levels of asset management focus? It makes sense to limit the number of fund managers in the initial stage, so as to generate viable scale for each fund manager.

The simplest way to remove the need for any subsidy for the NPS is, of course, to amend the Employees Provident Fund Act to allow workers to voluntarily migrate to the NPS. That would swell NPS numbers, increase the pool of funds to be managed and grant fund managers greater flexibility in diversifying their portfolios across asset classes to minimise risk.